Managing Money : No Early Drawing on Social Security Funds

QUESTION: Is there any way to draw or borrow on your Social Security payments if you are self-employed and not at retirement age?--J. L.

ANSWER: Absolutely not! Social Security officials say contributions to Social Security are not available in any way except upon the retirement, death or disability of the beneficiary. Your contributions to the fund also cannot be used as collateral for a loan. These rules are immutable and apply to all, self-employed or not.

However, there are other ways of tapping into money you may have set aside for your retirement. Some companies allow their employees to withdraw from or borrow against their 401(k) deferred compensation accounts. Also, some companies allow employees to borrow against their pension funds. Further, if you have established an individual retirement account, you may always withdraw some or all of those funds. However, you will be charged a penalty amounting to 10% of the IRA principal and stand to lose some accumulated interest.

Q: How would I calculate the gain or loss on stocks that I held with my husband and sold after his death?--H. S.

A: First of all, we’re going to assume that you and your husband held these shares as community property--that is, you owned half and your husband owned half. Under federal tax laws, when you inherit your husband’s half of the shares, their tax basis is the fair market value on the date of death. In addition, the law allows you to take this same value for your half, giving you, perhaps, the potential for sheltering some gain from income taxation.

Here’s how it would work. Let’s assume that you and your husband bought stock worth $50,000 several years ago and that on the date of his death the shares were worth a total of $100,000. Under federal law, his share would be valued at $50,000 and so would yours. If you sold those shares immediately for $100,000, you would not have a taxable gain--even though your actual gain is $50,000. If you wait and sell the shares for $150,000, your gain is just $50,000. This is a sweet little loophole for the widow or widower whose assets were held as community property.

If you and your husband held the stock as joint tenants, only your husband’s shares would be revalued as of the date of death, not yours.

California tax law mimics the federal code for deaths occuring after Dec. 31, 1986. However, in the case of deaths before that date, a spouse inheriting the community property shares from the deceased mate receives a new taxable basis only for the inherited shares, not for his or her own half of the shares. However, if the shares are willed to someone other than the spouse, both halves are revalued as of the date of death, even the surviving spouse’s shares.

Q: I’m still a bit confused about inherited assets. You recently stated that the tax basis for these assets is the fair market value on the date of death. But what about the acquisition date for determining the holding period of these assets? Is it also the date of death, or is it the deceased’s acquisition date?--J. S. C. Jr.

A: It is the date of death. However, with the abolition of capital gains taxes--capital gains now are taxed at the same rate as any other income--there are few instances when you need to distinguish between long-term and short-term gains. But in those cases when you do need to make this distinction, inherited assets are deemed to have been held as long as necessary to qualify as capital assets, regardless of when they were acquired by the deceased or inherited.

Q: Are self-employment taxes deductible as a business expense for the year in which the payment was made?--C. P. A.

A: No. The Internal Revenue Service says the “self-employment taxes” you referred to are more properly known as Social Security self-employment contributions. As contributions to your own Social Security account, they are no more allowable as a business expense deduction than are the Social Security taxes that other workers pay. The bottom line is that no Social Security taxes are deductible on your income taxes.

An update on Social Security earnings statements: After a brief delay and to the apparent joy of many, the Social Security Administration has just released a new and improved version of its popular Form SSA-7004, “Request for Earnings and Benefits Estimate Statement.”

The form is now available from the administration’s Consumer Information Center, Dept. 55, Social Security Administration, Pueblo, Colo. 81009. You may also get SSA-7004 from your local Social Security office, or by calling (800) 937-2000. However, since its opening last week, the telephone line has been swamped, and most callers have been greeted by a repeated busy signal.

When you get the form, complete it and mail it back to the enclosed address. The Social Security Administration will then send you a listing of your employment earnings and expected Social Security benefits. Agency officials recommend that you complete the form every three years to verify that they have your correct employment data.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.